Mortgage REIT stocks gain as dividends stay stable amid volatile MBS markets (NASDAQ:AGNC)

Mortgage REIT stocks climbed strongly in Tuesday trading after AGNC Investment (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY), and Dynex Capital (NYSE:DX) provided business updates to investors. AGNC and Dynex also declared dividends, which remained steady.

Book value continued to decline at all three companies while markets for residential mortgage backed securities, the securities that mortgage REITs invest in, remained volatile as the Federal Reserve continues to raise interest rates and reduces its balance sheet, which includes some MBS.

Annaly (NLY) estimated book value at $19.85-$20.05 per share at Sept. 30, 2022, down from $23.59 at June 30. AGNC (AGNC) estimated tangible net book value at $9.06-$9.10 per share, down from $11.43 at June 30. Dynex (DX) estimated book value of $14.15-$14.45 at Sept. 30 vs. $16.79 at June 30.

AGNC (AGNC) declared its October dividend of $0.12 per share, steady with its previous payment. As of Sept. 30, its “at risk leverage was ~8.7x, up from 7.4x at June 30.

As Annaly (NLY) had announced on Sept. 8, it’s keeping its Q3 dividend at $0.88 per share. It also said it has cash and unencumbered agency MBS of ~$4.1B and total unencumbered assets of $6.0B, as of Sept. 30. Economic leverage increased to 7.1:1 at Sept. 30 vs. 6.6:1 at June 30.

“Leverage has increased for the stocks, and liquidity has been drawn down somewhat, but stocks appear to be hanging onto dividends in the near-term,” wrote BTIG analyst Eric Hagen.

For AGNC, he estimates the gross hurdle rate on capital necessary to keep the dividend stable is near 15%, up from ~9% at the end of last year. Other mortgage REITs are likely operating with hurdles in the low-to-mid-teens. Hagen said he’d prefer AGNC (AGNC) to buy back its stock at these low valuations over the near term than to stretch to pay a high dividend.

“We remain cautious on dividends for most of the sector, although we see it being somewhat more sustainable in stories like Rithm (NYSE:RITM), and Dynex (DX),” BTIG’s Hagen said.

At the end of September, mortgage REIT stocks slid after Invesco Mortgage cut its dividend.